Why might you want to think twice about refinancing your student loans through a private lender? Here are some things to consider when determining if refinancing makes sense for you.
Perhaps you are a dental school graduate with large sums of debt and you find yourself with no choice but to enroll in an income-based repayment program for your federal student loans. In many cases this could cause your payment to drop from around $5,000 a month to under $1,000. The difference in your payment typically causes unpaid interest to accumulate separate from your outstanding principal (the amount you originally borrowed).
Your annual interest is based on your outstanding principal. So if you borrowed $450,000 of student loans and your interest rate is 6.5%, your annual interest is $29,250. If five years has gone by and you accumulated $100,000 in outstanding interest, you are still only being charged based on your original principal amount.
I talked to a student recently who graduated dental school a few years ago with $300,000 of student debt (a figure some of you would be happy to have!). For a variety of reasons, she hadn’t worked in the last three years and spent some time overseas before that. Her outstanding debt is now closer to $450,000. In just a few years her outstanding debt increased 50 percent. What happened?
There’s a pretty good chance that if you have student loans (and even if you don’t), you have received a flyer or some type of marketing piece describing how much interest you would save if you “refinanced” your student loans. There has been tremendous growth in the private student loan market and with that growth has come lots of marketing that has left recent grads confused and unsure about their debt. This post will discuss various aspects of refinancing your loans with a private lender and some of the potential negative consequences.